The biotech sector has had a generally strong year so far, gaining more than 10% as a group since the start of 2018. For a large number of biotech stocks, that strong performance looks set to continue according to a report by Stifel analyst Paul Matteis. Below, we focus on five of Matteis’ picks, chosen by our editors, out of those listed by Barron’s, including Vertex Pharmaceuticals Inc. (VRTX), BioMarin Pharmaceuticals Inc. (BMRN), Biogen Inc. (BIIB), Sage Therapeutics Inc. (SAGE) and Wave Life Sciences Ltd. (WVE).  

 Stock / ETF  YTD Performance
 SPDR S&P Biotech ETF (XBI)  + 12.2%
 iShares Nasdaq Biotechnology ETF (IBB)  + 10.1%
 Vertex Pharmaceuticals  + 17.0%
 BioMarin Pharmaceuticals  + 15.9%
 Wave Life Sciences   + 13.3%
 Biogen  + 9.9%
 Sage Therapeutics  - 11.1%

Upside for Biotech

While both biotech ETFs are up more than 10% and several stocks have outperformed, there have been some sector underperformers, like Biogen, and some that are actually down on the year, like Sage Therapeutics. However, with a buy rating on all of the above listed stocks, Matteis believes even the underperformers have strong upside and will be able to turn things around. (To read more, see: Despite Recent Volatility, Biotech Stocks Look Poised to Pop.)

For a large rare disease company, like Vertex, Matteis bases his bullish outlook on the way in which the company has been able to insulate itself from rival drug firms, not to mention their diversified portfolio and pipeline drivers. Biogen’s upside is related to the strength of the trial data for its Alzheimer’s treatment aducanumab, especially considering the difficult nature of the disease that has left other companies coming up short in their own drug trials, according to Barron’s.

Sage’s Depression Solution

Matteis believes that the latest trials for Sage’s depression and insomnia drug Sage-217, which is poised to be a practice-changing depression treatment, will successfully stand up to the scrutiny of the U.S. Food and Drug Administration (FDA). If so, the company’s stock should rebound from the 11.1% decline this year. Currently, Sage trades at a negative forward price to earnings ratio (P/E ratio) and has a five-year price-to-earnings-to-growth ratio (PEG) of 1.26. (To read more, see: Why Biotech Stocks May Reach New Highs.)

BioMarin's Long-Term Advantage

Like Vertex, BioMarin is another large rare disease company that has insulated itself from the competition in its own drug designs, while also having a diverse portfolio and pipeline drivers, according to Matteis. Back in May, the FDA approved Palynziq, the drug maker’s treatment for a rare disease called phenylketonuria, a problem with the metabolism that can lead to behavioral and mental problems. The FDA’s approval should help boost BioMarin’s performance over the long term, adding to its already 15.9% gain this year. The stock is currently trading at a forward multiple of 1,148.00, and a negative PEG ratio.